The Midland-Odessa retail market continues to get stronger due to the rise in oil prices over the last year. West Texas intermediate crude oil prices have risen from around $46 per barrel in June 2017 to more than $72 per barrel as of June 27, 2018.
According to a recent survey from the Dallas branch of the Federal Reserve, new technology is allowing energy companies to break even at $25 per barrel. In addition, the Midland Development Corp. (MDC) notes that the combined Midland-Odessa unemployment rate is down to 2.8 percent, which is the lowest on record.
Eric Eberhardt, Coldwell Banker Commercial Capital Advisors
The rise in prices, combined with this scaling of the oil-driven economy, is contributing to local consumers having more disposable income. In turn, spending at restaurants, hotels and retail stores in the Midland-Odessa area is up across the board.
Housing Connects The Dots
Due to the rise in oil prices and strong economic growth, demand for more housing developments in the Midland-Odessa market is strong and getting stronger. And wherever there’s a boom in housing, a new wave of retail development is likely to follow.
According to the MDC, roughly 500 single-family building permits had been issued as of March, the highest first-quarter total on record and a 28 percent jump from the first quarter of 2017.
The organization also recently found that housing prices are up about 6 percent from the first quarter of 2017. Also, as of May 2018, the average rent per unit quoted in the Midland-Odessa apartment market is up 37 percent from just one year ago.
With the increase in oil prices, spending, and housing developments, the Midland-Odessa market is extremely appealing for retail investors, developers and operators looking to enter or expand in the market.
Rental rates are responding quickly to heightened demand. In the first quarter of 2018, rents for shopping centers increased to nearly $16 per square foot triple-net. Overall rent growth in this category is up nearly 38 percent over the last four years and up 4 percent from this period in 2017.
This rent growth occurred despite the fact that overall occupancy decreased by 70 basis points to 93.4 percent. As is often the case, a surge in new development in the area is primarily responsible for the decline in occupancy.
New Projects Hit Town
Recent new developments in the Midland-Odessa market include Westridge Commons, a 38-acre mixed-use project that is currently under construction in Midland.
This is a major development that will bring more than 1 million square feet of new commercial and residential space to the city. The retail portion of Westridge Commons is expected to add more than 100,000 square feet of new space.
In addition, the site has attracted several corporate offices that will bring hundreds of jobs to the Midland economy, most notably oil and natural gas exploration firm Anadarko Petroleum Corp.
A 29,000-square-foot shopping center is also under construction on North Midkiff Road near the Midland Mall. This center will be branded Kimber-Lea Place, and it will feature retail spaces ranging in size from 1,000 to 11,000 square feet.
Coldwell Banker recently arranged the sale of Gateway Plaza, a 22,500-square-foot shopping center in Midland, to a local investor. The transaction is one of several significant retail closings of late in this market, which is seeing more competition from buyers.
The Kimber-Lea Place project, which is scheduled for completion in late 2018, is an interesting redevelopment play that speaks to the new direction that retail growth in Midland-Odessa is taking. The three-acre site was formerly a tennis center, but an Amarillo development company is repurposing the space into this upscale retail center. No tenants have yet been announced for this property.
Investment Heats Up
With such a strong economic outlook, retail investors are targeting more deals in the Midland-Odessa market. Several notable sales have recently closed in this area, including the disposition of the 22,000-square-foot Briarwood Plaza shopping center, which is located off W Loop 250 in northwest Midland.
This multi-tenant property was 100 percent occupied at the time of sale to a mix of local and national tenants and traded in the low 7 percent cap range. We are beginning to see cap rate increases, as buyers are not getting the same cash-on-cash returns as a year ago when interest rates were lower. Currently, Class A and B shopping centers in the market will typically trade in the 7- to 7.5-percent cap rate range.
In addition, a Lubbock-based investor recently purchased the 22,500-square-foot Gateway Plaza shopping center off Business Interstate 20. The sale included a nearby industrial asset, Capstone Industrial Business Park.
Coldwell Banker Commercial Capital Advisors represented both parties in this portfolio sale, which illustrates the close connection between demand for retail space and the success of the energy-based industrial market in Midland-Odessa. The properties sold for just over $16 million.
Overall, the outlooks for rent growth and investment sales volume are looking strong for the Midland-Odessa retail market in 2018. Investors should definitely consider the area for real estate acquisitions.
— By Eric Eberhardt, CCIM, Investment Sales Specialist, Coldwell Banker Commercial Capital Advisors. This article first appeared in the July 2018 issue of Texas Real Estate Business magazine.